Aegis Living CEO: Is The Management Contract Dead?

By Dwayne J. Clark, Co-founder and CEO, Aegis Living

When I first started out in the senior housing industry 34 years ago, management contracts were not only commonplace, they were highly sought after. As they say, “That was then, this is now.”

Back in my early days in the industry, an owner/developer would put out a bid for a single property or entire portfolio, offering a five-year contract, including a 5%-6% management fee with some performance perks built in, and companies would come running. If the management company didn’t perform – missed census goals, poor NOI results, or bad resident satisfaction scores – they were gone, and it was next company up. There was a time when Aegis Living spent countless hours and resources just to secure a contract. To us, like many others in the industry, it was critical to doing business.

Advertisement

Today, as the market heats up to meet current demand and capture the Silver Tsunami upon us, we’re facing a property management shortage. Some companies are being absorbed and others are leaving the space for better profit options, creating a bottleneck for future growth and demanding us to rethink the old model all together.

How did we get here?

  • Increased access to capital – The market demand coupled with a strong economy has led to more access to capital from major institutional investors, firms and others looking to get into the game. Interest rates are at a record low and capital returns are at an all-time high. Most recently, senior housing dwarfed almost all other property types with a 6.94% capital return according to a NIC report.
  • Entrepreneurs, new players entering the market – Established developers and entrepreneurs are entering the market. Many of these companies have developed retail, office, mixed-use properties, and more bringing a new expertise, savviness and sophistication to the industry.
  • Assisted living is more well-known – Awareness of the industry continues to grow as we prepare for the first baby boomer customer in 2026. Assisted living is quickly becoming a more popular choice among families looking for the best care and housing option for their loved ones.
  • Scarcity of talent – Most management companies are struggling to hire, train and keep up with their own growth. They are less likely to loan out coveted talent for a fee.
  • Operating costs continue to rise – Staffing continues to be the number one challenge, leading to higher wages and more expensive benefits. This coupled with increased insurance and liability costs leaves management companies with little room for profit.

Let’s do the math on a new build:

  • 90-unit new build cost: $35M
  • Annual stabilized revenue: $6.5M
  • Net operating income: $2.5M
  • +5% cap rate to sell (in a good market)
  • New value = $50M
  • Net profit = $15M

If a company takes on a fee-for-service contract, they are typically going to make 6% of gross revenue. Most companies with rising costs can barely make profit at 6%. But, let’s say they make $50,000 a year profit, that’s $250,000 over five years. If they negotiate 10% of increased value plus fees, that will equate to 6x more the value. Even then, most great companies would never settle for only 10%.

This is the crux of the dilemma: too much opportunity to settle for just fees; too little good talent for real estate owners to shop the market like they used to. Without the luxury of multiple quality operators clamoring for management fee contracts, too many ownership groups are making short-sighted decisions. Rather than partner with an operator willing to work under the traditional management fee structure, owners should consider new partnership models that will incentivize best-in-class management talent to come on board.

So, how do owners choose the best partner to invest in? While Aegis Living has moved away from management contracts to focus on owning and operating our 32 communities, we have found a few common themes among top management companies, those we consider the “Five-Tool Players”:

  1. A great leadership team, including internal excellence across development, operations, care, programming and more. At Aegis Living, we have long looked outside of the industry to bring in top talent and innovation. Today, our team represents experience from many world-class companies such as Amazon, Nordstrom, Four Seasons and Starbucks.
  2. Knowledge of what makes a great site/location. This means knowing how to weight critical data and how to interpret that data to your benefit – things like house values, age and income of qualified caregivers, drive-by numbers, presence of certain retail that aligns with your demographics (substantiating your data), among other more sophisticated indicators.
  3. Beautiful architecture centered on staff efficiency and exceptional programming. A community must be more than a pretty building – every square foot must be purposeful. For example, a property with too many floors or even a kitchen located in the wrong spot can have an impact on staff time that you will want focused on resident care needs. You also want to reflect the neighborhood where the community resides, creating a sense of home and driving loyalty among residents.
  4. Innovative experiences to create full lives. We’ve all moved beyond the “three B’s” – birthday, bingo and bible study. Today, we are pushing new boundaries with technology – using virtual reality to take our residents on bucket-list trips or to see how their hometown has changed. At Aegis Living, we have a life enrichment director at each community to drive meaningful programing and a Life Enrichment Vice President that focuses on driving new innovations. Each property has onsite experiences – from a tugboat to a built-in Winnebago to a virtual ski lift experience to allow residents to relive nostalgic moments.
  5. World-class care through employee-centered culture. This starts with employee onboarding and training. Aegis Living offers a multi-month general manager training. We recently created Aegis University to grow talent from within and have launched a Certified Nursing Assistant (CNA) certification program. We encourage our employees to bring new ideas and solutions to the table through our Black Box program.

With these five tools, business potential is unlimited. If you secure four of the five, you’ll be recognized as a rising star in a competitive industry. If you have three, you might be profitable in the short-term but long-term potential will be limited. Having only one or two will put your business at risk.

Being shortsighted and not investing in the right management company upfront is a growing epidemic in our industry. Owners that want long-term success must align profit, motive and enterprise value with the operator. In the long run, they will be glad they did.

Dwayne Clark, courtesy Aegis Living

Dwayne J. Clark founded Seattle-based Aegis Living in 1997, having previously held positions with Leisure Care and Sunrise Senior Living. Today, Aegis employs more than 2,000 staff members across its growing portfolio of 32 assisted living and memory care communities, with more under development. Clark is also involved in philanthropy, including through the Clark Family Foundation, D1 Foundation and the Potato Soup Foundation. He is an author whose most recent book is “30 Summers More,” published September 2019. His wife Terese is a former nurse, and his children Adam and Ashley both work for Aegis.

Companies featured in this article: